An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax (GST), excise, tariff) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax, which is collected directly by government from the persons (legal or natural) on whom it is imposed. Some commentators have argued that "a direct tax is one that cannot be charged by the taxpayer to someone else, whereas an indirect tax can be."[1]

An indirect tax may increase the price of goods to raise the price of the products for the consumers.[2] Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately, the manufacturer transfers the burden of this duty to the buyer of the car in the form of a higher price. Thus, an indirect tax is one that can be shifted or passed on. The degree to which the burden of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect.

The term indirect tax has a different meaning in the context of American Constitutional law: see direct tax and excise tax in the United States. In the United States, the federal income tax has been, since its inception on July 1, 1862,[3] an indirect tax[4] (more specifically an excise[5][6]) even though during the 1940s, its application grew from a historical average[7] of about 8% of the population paying it to around 90% of the population paying it as a measure to support the war effort.

The concept of Value Added Tax (VAT) as an indirect tax was the brainchild of a German industrialist, Dr. Wilhelm von Siemens in 1918 – a hundred years later, the tax which was devised to be efficient and relatively simple to collect and enforce is together with Goods and Services Tax (GST), now in place in over 140 countries globally.[8]

General government revenue, in % of GDP, from indirect taxes. For this data, the variance of GDP per capita with purchasing power parity (PPP) is explained in 0 % by tax revenue.

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Indirect taxation is policy commonly used to generate tax revenue. Indirect tax is so called as it is paid indirectly by the final consumer of goods and services while paying for purchase of goods or for enjoying services. It is broadly based since it is applied to everyone in the society whether rich or poor. Since the cost of the tax does not vary according to income, indirect taxation includes Ad Valorem tax and Specific tax, of which Ad Valorem (VAT, GST) is proportional and Specific tax is fixed. However, indirect taxation can be viewed as having the effect of a regressive tax as it imposes a greater burden (relative to resources) on the poor than on the rich, as both rich and poor pay the same tax amount for consumption of a certain quantity of a specific good. The taxpayer who pays the tax does not bear the burden of tax; the burden is shifted to the ultimate consumers. In the case of a direct tax, the taxpayer has to bear the burden of tax personally; in case of indirect tax the taxpayer and the taxbearer are not the same person.

^“The whole body of internal revenue law in effect on January 2, 1939... has its ultimate origin in 164 separate enactments of Congress. The earliest of these was approved July 1, 1862; the latest, June 16, 1938."--Preamble to the 1939 Internal Revenue Code

^"[The] tax upon gains, profits, and income [is] an excise or duty, and not a direct tax, within the meaning of the constitution, and [] its imposition [is] not, therefore, unconstitutional." United States Supreme Court, Springer v. U. S., 102 U.S. 586 (1881) (as summarized in Pollock v. Farmer's Loan & Trust, 158 U.S. 601, (1895))

^"The income tax... is an excise tax with respect to certain activities and privileges which is measured by reference to the income which they produce. The income is not the subject of the tax; it is the basis for determining the amount of tax.”--Former Treasury Department legislative draftsman F. Morse Hubbard in testimony before Congress in 1943

^"Income Equality in the United States 1913 to 1958", Thomas Picketty, EHES, Paris, and Emmanual Saez, UC Berkeley and NBER page 65